Trading AUD/USD

The popularity of the AUD/USD currency pair, otherwise known as the ‘Aussie’, has surged in recent years. As a result of Australia’s commodity boom in recent decades, the pair now unites two expanding and influential economies. This page will break down everything you need to know about the AUD/USD pair, from its benefits and drawbacks to currency correlations, history, and strategy, including trading hours, signals, charts, and top tips.

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Breaking Down ‘AUD/USD’

Before we get into the details, what precisely does AUD/USD mean? Quite simply, the exchange rate tells you how many US dollars (quote currency) are required to purchase one Australian dollar (base currency).

The AUD/USD cross is now the fourth most actively traded currency pair. In recent years, the AUD/USD has seen months where it represents around 7% of total forex market turnover. However, it is not one of the six that form the US dollar index (USDX).

Why Day Trade AUD/USD?

Before we consider AUD/USD day trading strategies and fundamental analysis, why should you opt for this particular currency pair when there are so many options currently available?

  • Volatility – As a result of the high-interest rate differential between Australia and the US, day traders can benefit from high levels of both volume and volatility. This could mean greater opportunities to turn profits. In bull markets, the AUD/USD pair run upwards much quicker than other pairs, whilst in bearish market environments, it can drop much sooner.
  • Major currency performance – In recent years the Australian dollar has become the highest performing major currency. It has seen an increase of in excess of 30% over the US dollar.
  • Economic stability – Data has shown the Australian economy has surged through exports and commodities, whilst retaining a solid foundation with a central bank. The Australian economy has even managed to grow year-on-year, whilst other economies have suffered at the hands of a global economic downturn.
  • Trading relations & GDP – The trading relationship with China allowed the Australian economy to avoid the global financial crisis. Plus, Australian GDP is on the rise. All of this makes investing in these powerhouse economies an attractive proposition.
  • Diverse trading vehicles – Due to the AUD/USD’s increasing popularity, individuals can benefit from a number of different trading vehicles, from ETFs to E-micro futures, options, and more.
  • Availability of resources – Daily and weekly analysis is far easier today thanks to the range of resources available. Websites and forums offer market overviews and analysis. Sophisticated live streaming charts and graphs are now highly customisable. You can get bespoke indicators, 1-minute, 5-minute, 15-minute, and 1-hour charts, plus conduct straightforward Elliott wave analysis.

Drawbacks/Risks

Despite AUD/USD statistics demonstrating promising growth and attractive trends, there remain several drawbacks and risks to trading with this currency pair.

  • Stability misconception – Traders often take for the granted the power and stability of US economy over other economies, such as Australia. However, because this is a cross pair, you need to ensure you analyse both economies against each other. Not keeping up-to-date with political and economic sentiments in both could lead to costly mistakes.
  • Volatility – Part of the allure of the AUD/USD currency pair is the promise of volatility. However, these sharp moves can also lead to significant losses. So, if you do invest substantial capital into this pair, one of the top trading tips is to employ an effective money management system.
  • Leverage risks – Trading on margin allows you to borrow funds to maximise your position. But whilst this may bolster potential profits, it could also amplify losses.
  • Automated competition – You may have attractive bid-ask offer spreads and all the bar charts and graphs in real time in front of you. However, you are now competing with more sophisticated trading algorithms than ever before. This means asserting an edge when you’re live chart investing is increasingly difficult.

Influences on Movement

By reviewing AUD/USD relationship through long-term data, it is clear there are several main factors that influence prices. These include:

Commodities & Trading

  • Commodity prices – The Australian economy, to a certain extent is shaped by their significant role in commodities. They are the largest coal and iron ore exporter. So, when commodity prices rise, the Australian dollar often strengthens. When there is a fall in the price of commodities, the Australian dollar weakens. This was demonstrated in 2015 when commodity prices slumped and the Australian dollar fell by over 15% against the US dollar. In fact, it almost reached parity against the New Zealand dollar (NZD), which has not happened since the 1970s.
  • Trading relations – This is particularly important for the Australian dollar. The Australian economy is closely linked to trading relationships in Asia. So, changes in commodity demand from China, India, and to some extent Japan, can all cause the strength of the Australian dollar to increase or subside.

Other Influences

  • Interest rate differential – Interest rate decisions laid out by both the Federal Reserve (Fed) and the Reserve Bank of Australia (RBA) can impact AUD/USD rates and prices. For example, the Australian economy is currently performing well, so the Australian dollar looks set to continue increasing in value.
  • Economic indicators and data – Price action often centres around the release of key economic data and indicators. So, news announcements and reports on GDP, retail sales, inflation, trade balances, and industrial production, can all trigger movement in the AUD/USD currency pair.
  • Inflationary pressures – Normally, high commodity prices create recessionary pressures on developed nations. This can lead to concern over the sustainability of economies in North America and Europe, for example. When this happens, the Australian economy emerges as a beacon of hope, which again can strengthen its currency’s value.
  • Political announcements & natural disasters – Major political elections, new policies, wars, terrorist incidents, plus natural disasters, can all lead to serious fluctuations within the AUD/USD.

So, whilst day trading the AUD/USD pair calls for technical analysis via daily, weekly, and monthly price charts, it also demands an understanding of the underlying economic forces at play.

Currency Correlations

Part of your AUD/USD trading view also needs to take into account relevant currency correlations. Currency pairs do not move independently of each other. The success and failures of certain pairs will influence others.

Correlation is actually a statical measure, ranging from -1 to +1. Which side of ‘0’ correlation will fall depends on whether the pair is positively or negatively correlated. Correlations can also change over time.

  • Positive correlation – This is simply when pairs move in tandem with each other. The AUD/USD, GBP/USD, and EUR/USD FX pairs are positively correlated. This is a result of the US dollar being the counter currency. So, all pairs will reflect changes in the US dollar.
  • Negative correlation – This is when forex pairs move in the opposite direction. For example, USD/CHF, USD/JPY, and USD/CAD pairs. This is because the US dollar is the base currency.

Note the correlation with the USD/CAD pair may also be partly attributed to the positive correlation between the Australian and Canadian economies, as both are heavily involved in commodity exports.

Gold Correlation

Another important area is AUD/USD correlation with gold. Gold has a positive correlation with AUD/USD. So, when gold is going up, AUD/USD goes down. When gold goes down, AUD/USD goes down.

What does this mean for you? It means you can look at the movement in gold markets to make AUD/USD forecasts for tomorrow.  So, get up currency correlations in a yearly chart and your future outlook could be seriously enhanced. Even looking at movement last week or in recent market hours may suggest price action is imminent.

AUD/USD Day Trading Strategy

Regardless of whether you opt for a breakout or scalping strategy, there are a number of factors to consider below that could enhance your intraday trading performance.

Timing

Regardless of what strategy you use for live, online AUD/USD day trading, timing could make all the difference to your end of day profits. Whilst 24/7 forex trading is available, certain time periods will offer the greater levels of volatility and volume needed to generate substantial profits.

So, when is the best time to day trade the AUD/USD currency pair?

You will find the biggest daily moves and greatest volume during Australian working hours (overlapping with the Asian trading session), plus during the most active US trading hours. Economic reports, such as non-farm payrolls, durable goods orders, and consumer inflation data, can also all trigger significant spikes and shifts.

So, for the greatest volatility, focus your attention on day trading between 00:00 and 02:00 GMT, plus 06:00 to 08:00 GMT. Then for the most volume and trade activity, head back online between 12:00 and 17:00 GMT.

News

There are a number of different approaches you can take day trading on the AUD/USD currency pair. Some will utilise historical price charts and basic daily charts, whilst others will make their expectations based on news updates.

Market sentiment and price action can quickly shift with breaking news. If you can anticipate where the trend will head, you can capitalise on these news updates.

To do that, you need to have reliable news resources you can turn to. Some of the most highly regarded include the following:

  • XE
  • CNBC
  • Reuters
  • Bloomberg
  • Forex factory
  • Yahoo Finance
  • Google Finance

These can prove invaluable. On top of standard AUD/USD commentary and the latest technical analysis, they can also offer the following:

  • Exchange rate history
  • Predictions and forecasts for today
  • Daily and monthly moving averages
  • AUD/USD specific trading definitions
  • Long-term charts, averages and outlooks
  • Daily, weekly, and monthly data and forecasts
  • 1-year, 5-years, 10-years, 20-years, and 50-years charts
  • Short-term AUD against USD trend predictions and forecasts

Many of the above sources will also have obscure trends and unusual daily moves explained by experienced FX traders. So, used correctly, the news today is a powerful weapon to add to your day trading arsenal.

Example

Breakout strategies are often thought to be effective techniques for capitalising on fluctuations when the AUD/USD currency pair is considered so volatile. After monitoring support and resistance, positions should be entered in anticipation of a break. If price continues in the direction, you can hopefully profit.

Reversal at Support/Resistance

Look no further for a straightforward AUD/USD day trading strategy. Support or resistance could be a horizontal or diagonal line, but it is the point that price has reversed off at least twice before. This should include the starting point of your support/resistance line.

It’s worth noting support and resistance are usually areas, instead of specific prices. So, your trade setup can actually take place slightly above or below.

The support and resistance then tell you to be ready because a reversal or breakout could be fast approaching. You would then need to wait for consolidation near your support/resistance. If the price breaks above a consolidation near support or breaks below a consolidation near resistance, then you have your trade signal.

When the reverse signal does then occur, take your trade when the price moves just above the consolidation near your support, or just below consolidation near your resistance. If your AUD/USD pattern does indeed appear, you are anticipating the price will ricochet off support or fall off resistance.

However, if the price fails to do that and instead breaks above the major resistance area, or breaks below the major support area, then you should exit the trade as soon as possible.

Risk Management

AUD/USD discussions often focus on buy and sell rates, hourly forecasts, opening and closing positions, daily ranges, but not on how to mitigate risk. It doesn’t matter if it’s the lowest or highest ever historical prices today, without an effective money management system you may not still be in the game next week.

So, what precisely is an AUD/USD risk system? Its meaning is simple. It is a way of protecting against losses by pre-determining position size. Most traders recommend risking no more than 1-2% of your account balance on a single trade.

For example, if you have $10,000 in your account, you wouldn’t bet more than $100 to $200 on a single trade. That way even if you lose, you still live to fight another day. This basic technique could prevent you from sinking into the red.

As famous trader Paul Tudor Jones asserted, ‘risk control is the most important thing in trading.’

So, forget closing prices, buy/sell spreads and picturesque candlestick charts, sit down and determine your risk parameters first. Moving forwards and capitalising on the next rally with promising pip movement will be far easier if you still have capital left in your account.

Last Word on Strategy

Whatever your trading plan involves, from daily pivot points to scalping, employ your strategy at the most effective time. Plus, take into account the latest news updates and breaking announcements that may help you predict future price movement.

History

Early History

There was a time when the Australian dollar was connected to the British pound. The Australian dollar was at the mercy of the pound, rising and falling in tandem. Yet 1946 brought about a change. The Australian dollar was pegged to the US dollar for a short period before it returned to the British pound.

By the time 1966 rolled around, the Australian dollar was launched as a decimal currency, followed by the deregulation of Australia’s financial system. The result of this was significant price movement in global forex rates as the open-market system was now in the crosshairs of the country’s reserve bank.

It wasn’t until 1983 that the AUD/USD pair begin to display its strength. Copper, iron, and gold exports were partly behind this illustration of might. These represent approximately one billion Australian dollars and around a half of the nation’s total exports.

As trading relations with China and other exporting became stable, the country and currency enjoyed consistent growth.

Recent History

Many traders do not realise how much your AUD/USD and forex outlook of today is shaped by past events. Understanding the context of this currency pair’s relationship may allow you to make more accurate exchange rate forecasts and predictions.

The Australian economy and the popularity of trading Australian dollar currency pairs has increased in recent years. In 2012, the AUD/USD pair was the third most popular currency pair in the word, jumping two places in just two years. A stable trading relationship with China, high-interest rates, plus commodity exporting is partly to thank.

In fact, the Australian economy has grown year-on-year since 2001, facing just one obstacle during the 2008 global financial crisis.

Minimal intervention from the RBA in the last ten years has attracted huge numbers of FX traders to the AUD/USD currency pair. However, surprisingly strong reversing trends when central banks make unexpected announcements can lead to traders suffering substantial financial losses.

Role of Australian DollarDay trading AUD/USD forex pair

An important element of AUD/USD trading economics is recognising the role of the Australian dollar. Currency forecasts will reflect Australia’s economic influence.

Today Australia boasts the 12th largest economy in the world. In 2013 it had a GDP of an impressive $1.56 trillion. Services form 68.6% of GDP. Their most influential services include finance, media, education, and logistics.

However, as touched upon elsewhere in this page, the Australian dollar is a commodity-based currency. For example, you will see a high correlation with the prices of exported commodities, from coal and iron to copper and gold. The strength of the Australian dollar vs the US dollar is tied to the success of their exported goods.

So, the Australian dollar plays a huge roll in international trade. As such, to make accurate predictions on your live forex chart, you should consider the following key indicators:

  • GDP
  • Trade Balance
  • Employment Change
  • Consumer Price Index (CPI)
  • Producer Price Index (PPI)

In addition, to find reports on their grain commodities, see Australia’s Bureau of Agricultural and Resource Economics and Sciences (ABARES). Online you will find free data on crop planting, weather, harvests, mine output, plus other grain commodity statistics.

The Australian dollar also now plays an important role in the forex space. Because of the economy’s consistent strength, the Aussie is now the fifth most traded currency, playing a part in 8.6% off all FX trading.

So, the Australian dollar plays a vital role in international commodities trading, as well as forex trading. Plus, the Australian economy is one of a select few large economies still with a AAA Debt rating. This further highlights its political and economic stability. All of these factors will continue to attract aspiring AUD/USD traders.

Role of US DollarDay trading on the AUD/USD currency pair

You cannot make accurate daily forecasts, let alone 3-month or 12-month AUD/USD forecasts without understanding the crucial role the US dollar plays. Their GDP represents around 25% of the global nominal GDP.

After China, the US is the second-largest trading nation in the world. They are also the second-largest manufacturer. In 2013, their industrial production was $2.43 trillion and greater than the output of Germany, France, India, and Brazil combined.

Below are just a few of the vital roles the US dollar plays:

  • Many banks all over the world hold currency reserves in the US dollar.
  • Some countries actually adopt the US dollar instead of their own or peg their own currency to its value.
  • OPEC countries carry out oil transactions in the US dollar.
  • US dollars are often primarily used to settle international transactions.
  • 87% of forex trades have involved the US dollar in recent years.

When you consider the staggering size of the US economy and its numerous strengths, it’s straightforward to see how economic data on the US can impact the forex marketplace, and in turn, the AUD/USD currency.

The following economic indicators often influence live FX exchange rates:

  • Non-farm Payrolls
  • Consumer Price Index (CPI)
  • Producer Price Index (PPI)
  • Trade Balance
  • ISM Non-manufacturing
  • ISM Manufacturing
  • Retail Sales
  • Industrial production
  • Federal Reserve Minutes
  • Consumer Confidence

Your AUD/USD technical analysis should consider many of these data releases in the economic calendar. In addition, every six weeks, Federal Open Market Committee meetings are held. Every two to three weeks press conferences will be given, alongside expectations and forecasts. Each announcement could potentially trigger shifts in the AUD/USD currency pair.

Final Word

The AUD/USD promises day traders all the attributes needed to generate substantial profits, including rich liquidity and volatility. However, this hunting ground comes with tough competition, so asserting an edge will require a number of elements.

Because it’s one of the seven major pairs that contain the US dollar, staying aware of both monetary policy and interest rates set by the Fed and RBA is crucial. Careful technical analysis, including real-time charts and the news, will all be needed to capitalise on those bullish or bearish patterns. Just as important though, is finding the right broker for your individual needs.

For further guidance, see our forex page.